Network effects. They make the tech world spin around, in the pursuit of growth.

Why? Easy: because CAC is halved for every single user that brings another one. Then it becomes a third, if another user is added, and so on.

The key consequence of the network effect is scale. In the time it took you to recruit a user, you can simply plant seeds and some of the branches will take care of themselves.

Upon further study, people have classified these network effects. Not a lot of people, since it’s still a young/immature concept — but since it’s the gate to a very heavy golden treasure, it happened.

I find it interesting how both Uber and Facebook have network effects, though they’re different. Yes, buzzword alert, we’re talking about Uber and Facebook.

They’re both one of the fastest growing companies we’ve seen. And not coincidentally, they’ve gathered users extremely fast — but in different ways.

Facebook scaled as the telephone — the more people use it, the better it becomes.

Uber’s situation is the same, but with a caveat: the more people from the opposite side use it, the better it becomes.

In other words, the more drivers you have, the better it is for you, as a rider.

Too many riders? Surge pricing.

Too many drivers? Less profit for each.

Nonetheless, Uber’s valuation still uses 11 digits and I wouldn’t be surprised if soon enough they’d hit 12 digits (unless the Black Swan event occurs).

Choose your network effect — and choose it wisely.

About Ch Daniel

I’ve updated this signature in July 2020, so older mentions of the signature might not make sense.

I currently don’t write on this blog anymore. I wrote daily for 9 months on this very blog, but now I’m focused on building the CH Group.

If you want to follow my newer articles, check out the CH Group’s blog.

See everything I do here: Chdaniel.com